The Difference in Income Between Absorption and Variable Costing Can

question 6

Essay

The difference in income between absorption and variable costing can be explained by the change in finished-goods inventory (in units) multiplied by the standard fixed manufacturing overhead rate.
Required:
Explain why this calculation accounts for the difference noted.

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Definitions:

Investing Activities

Transactions involving the purchase or sale of long-term assets and investments, reflecting how cash is spent on investments to grow or maintain the business.

Financing Activities

Transactions and events where a business obtains funds or pays back funds to owners and creditors, typically reflected in the cash flow statement.

Direct Approach

A method used in financial accounting that records all transactions directly affecting the income statement, emphasizing cash receipts and payments.